Monday, April 6, 2015

Middle Class Wealth

Last week we took a peek at income quintiles for American households: if you lined up each American household from richest to poorest, and broke them into fifths. The results were fairly shocking for me. The main lesson? We could really benefit from earning more. Sixty percent of U.S. households are making less than $66k per year.

Luckily, a lot of Done by Forty readers are doing better. Let's take a look at the poll results:

I am again using the five terms of Lower Class, Lower Middle Class, Middle Class, Upper Middle Class, and Upper Class to designate each of the quintiles: this time though, they'll match with net worth instead of income. So how do the quintiles stack up? A breakdown is below. (A quick note: each dollar amount is the median household net worth for that quintile. In other words, it is the net worth for the household right at the 10th, 30th, 50th, 70th, and 90th percentile, respectively.)

Bottom 20% of households ("Lower Class"): -$6,029

Next 20% (or what I'd call "Lower Middle Class"): $7,263

Middle 20% (the true middle "Middle Class"): $68,839

Next 20% ("Upper Middle Class"): $205,985

Top 20% (the "Upper Class"): $630,754

These figures are from 2011, so the data's older than what we'd seen with the income quintiles. Things have likely changed a bit. But the story is still pretty stark: the median net worth in the poorest 20% of US households is actually negative. The next twenty percent of households are barely any better, with a median net worth of only $7,263. This means a full forty percent of U.S. households are either barely treading water, or are slowly drowning. I suppose the middle class quintile looks better by comparison with a median net worth of $68,839, but that's still roughly one to one and a half years of household wages for the middle quintile. Considering that this net worth figure also includes home equity, it's a pretty bleak picture.

As with the income quintiles, it seems household net worth really turns the corner at the fourth quintile. You've made it when you're in the top 40%.

Another interesting bit is seeing how these net worth quintiles have changed from 2000 to 2005, and then to 2011. These snapshots show how things went for American households from the dot-com recession, checking in mid-boom, and then again right after the latest recession, in the middle of the recovery. The figures tell a binary narrative. Click here for a cool graphic, also represented in a less-cool table below. (All figures are in 2011 dollars).

So over that eleven year period, things got worse for the bottom three quintiles. Those groups each saw a net loss in their median net worth, despite a fairly long period of time to save and invest. Of course, it's also a significant amount of time to lose employment and take on debt. Draw your own conclusions.

On the other hand, things got better for the top 40%. Both the upper class and upper middle class quintiles saw around a 10% gain in their net worths from 2000 to 2011, despite the impacts of the most recent recession.

I'm no economist, so I can't pick out the reasons for these divergent trends. What's obvious is that, unless things dramatically turned around in the past few years, things really are getting worse for a majority of American households. Four out of five household quintiles (80%) saw real incomes decline from 2003 to 2013. Three of five household quintiles saw a net reduction in their median net worth over a similar timeframe.

How do they turn it around? Is frugality the answer in a declining income environment? Adding income via side hustles? Is it as simple as reading this blog, since exposure to my ramblings is a surefire way to increase income? Let's hear your best idea in the comments.

And if you're game, vote below to show which of the median household net worth quintiles you're closest to.

55 comments:

Wow. These numbers are shockingly horrible. Somehow, I expected the higher tiers to be much higher than they are - and I guess I'm really dismayed at how low the bottom three are. Were you able to find a range for each group or just the median? I suppose it's almost moot, but it would be interesting to know if that middle class range is from $40-$90K or more like $20-$150.

Anyhow, as I suspected, I'm in a significantly higher bracket for net worth as opposed to income. And since I never made a lot of money to begin with, and certainly haven't made a killing in the stock market or anything like that, I have to say that the answer lies in simply refusing to participate in all of the ridiculous consumerist BS that is considered "normal" in this society.

It is really bad. I didn't want to come off as an elitist in the article, but even the fourth quartile is not that impressive, when you consider a big chunk of the net worth is just home equity.

I may be able to find ranges, but they weren't immediately apparent in the spreadsheets I found. Here's a link, in case you're more adept at finding data than this English major is:

https://www.census.gov/people/wealth/data/dtables.html

I think you're a great example of how frugality (or just avoiding consumerism) can build serious wealth. It's a model that others can draw from.

My concern with that approach has to do with the declining incomes that the bottom three quintiles are experiencing. If that trend is a lasting one, the ability to get ahead simply by spending less is diminished somewhat. It still may work, of course.

I totally agree about declining incomes. I guess the whole topic of frugality leaves me with sorta mixed emotions. On the one had, I am living proof that one can save a substantial chunk of even a very modest income. On the other hand, there is something very, VERY wrong with a society in which the wealthiest sliver keeps getting richer and richer while everyone else struggles to stay afloat.

I mean, I'm pretty good at bucking the system, and I do get a bit of joy out of "sticking it to the man" as it were. But it's not reasonable to expect everyone to live like I do... actually it's probably not even possible! Plus, one shouldn't have to be a radical in order to be financially secure, especially in a society as wealthy as ours.

Until people are willing to live within their means this will always be a problem. Being labeled frugal is so not cool and is mistaken for the perception of being cheap. Just watching HGTV and seeing a couple leave a 2000 sq ft home to live in a 3000 sq ft home because their having a baby is just crazy. We need to stop getting caught up with portraying a persona of rich and mirror what our bank account can handle.

If you want to look at some fairly granular data, DQYDJ.net had a few pieces a couple months back that looked at various cross-sections of the data. Quintiles of net worth at varying ages, how well wealth and income correlated and if that changed depending on the age of the individual. Really neat stuff!

Definitely increasing side hustles to build income. Can't say I have a ton of ideas in the pipeline, but I've been meaning to diver deeper into this now that my time in Corporate America is just about running out.

It's demoralizing to see how things can work... My old co-worker recently got promoted to a senior level engineering position and the company "rewarded" him with a $2k bump (before taxes). It's tough to move on up in that kind of environment.

I think net worth is an interesting way to look at things. Honestly I'd rather have a high income and low net worth than the other way around. But then again, that's from a middle 20s perspective. I know there are a number of people my age who have a higher net worth than me right not but don't even make 1/2 the income I do. Long-term (assuming I stay on the same career path and don't get derailed) you're much better off having a higher income than short-term net worth. With that being said, people can build a sizable net worth at any income level and I know some do not have much choice in what they make (teachers? Granted they can work in the Summer at a second job...).

That's a really interesting point, DC. Income bumps early on give you a much higher ceiling later in life. I completely agree, and was trying to hit on that point last week. By definition, younger people should have lower net worths (and perhaps lower incomes than their 'future selves').

I think the long term goal is definitely higher net worth, however you get there. A big income's the easiest way, provided you can save a good percentage.

The low net worth numbers stop being surprising when you visualize the equation the numbers came from: assets - liabilities = net worth. It's the liabilities (as in mountains of consumer debt PLUS a huge mortgage from buying too much house) that drive that resulting number down. Way down.

I just read about the reasons for this (one man's opinion, anyway" in Robert Kiyosaki's Second Chance book. His thoughts are truly amazing, and have changed the way we are doing things here. I think financial education is so much a part of the deal. The janitor who retired with millions in the bank is living proof of that. Another awesome post, DB40. Thanks. :-)

I find the net worth quintiles very depressing! I think a lot of people think being frugal, doing a side hustle, or working harder is the answer, but wages are stagnant and small raises for "promotions" are very common.

Interesting numbers for sure. I believe the cause is actually very simple - the rich keep getting richer because they keep doing the things that make them rich. The poor keep getting poorer because they keep doing the things that make them poor.

I do not believe for a second that an increase in income will ease the tide at all, and because of one very fundamental reason. If one doesn't know how to save (or, if one refuses to acknowledge the benefit of saving), then it will NEVER matter how much one makes because it'll always get spent.

One can come up with as many side hustles as they want. If they continue spending every dollar that they make, then whether they make $20k or $80k, it'll all be spent and savings will continue to stagnate among this population. Sheer income is almost never the answer unless a solid and consistent savings plan has been established. Start with savings, then proceed to income.

The solution here NEEDS to come via education. We need to teach our population the value of saving their money, how to budget and show them the numbers. Show them how easy it is to save. Start in elementary school. Continue through high school. These are CRUCIAL skills that very few people actually have, and it is costing them money every single year.

This points to the possibility that a lack of knowledge is not the root cause of financial issues.

I obviously agree that spending 100%+ of income means you can never get ahead, regardless of additional income you receive. Savings needs to be a foundational skill. But when 40% of households are making less than $40k a year, they have an income problem. They may have a savings problem, too.

I completely agree, DBF. When your household is making $40k or less, you're likely spending close to every dime of that. My household is quite frugal - our total spending was $27k for 2014, $37k with the mortgage payments. If we were making $40k, that'd leave little room for saving, even if we shaved another $2-3k in spending. We're blessed to be in the 4th quintile, so we're saving a lot. It just doesn't seem to be in the cards for the bottom 2 (possibly even the bottom 3) to build much wealth without some kind of income increase. I agree with you somewhat, Steve, that blanket minimum wage increases and raises wouldn't cause much change because people would spend it still - but only for a time. The windfall mentality is a real phenomenon. However, if people received substantial, permanent wage/salary increases, I firmly believe they'd start making better money decisions after spending the first bit. Perhaps that's naive, but I work a lot with low income families, and they want to do what's best for their families just the same. I have to believe that they'd figure out how to do that responsibly and not live outside of their means. Just my two cents. Thanks.

When you consider the impact of taxes, those families likely wouldn't even be able to handle your $37k in total spending without taking on more debt. And I know your $37k figure is hard earned. There's always more fat to cut, of course, but frugality really has diminishing returns after a certain point.

Of course, these things all need to work together: good saving and investing habits, frugality, increased income. But without a certain level of income, the rest of these approaches are kind of a fool's errand. I feel like an asshole telling a family living on $30k to scrimp and save their way to wealth.

I think our differences here stem from how independently we view spending and saving. Once people's basic needs are met, any additional income is just that - additional. It's extra. Thus, a family making $40k and spends, say, $30k on their basic needs (which is VERY easy in this country), enjoys an additional $10k to play with, and that either gets devoted towards savings, or it simply gets spent.

In the above scenario, they do not - in my view - have an income problem. If they spend the remaining $10k, that was spent by choice on things that go beyond basic necessities, like cable television service, flat screen TVs, cell phones, nice computers, etc. This is a problem with spending.

People need proper motivation and experience to change their habits, whether they be spending or otherwise. If that person suddenly gets a nice raise and now brings home $50k a year, the smart thing to do is, of course, save the additional income. But lifestyles are tough to break, and unless they are properly motivated to save and, more importantly, understand its importance to the future of their families, there is no reason that the person will change his or her spending habits.

People with 10 times that income have the same problem.

Living outside of your means is not a problem that is tied to income. People from all different cultures, backgrounds and walks of life live outside of their means. While I certainly grant you that additional income COULD mean an increase in savings, my argument is there is very little impetus for a lot of people to suddenly make that switch.

It's a lifestyle change, and lifestyles are definitely tough to break.

I hear what you're saying, but your analysis ignores taxes (SSI, Medi, Fed, State), so that "extra $10k" is a relatively small figure.

My wife and spend roughly $30k annually now easily, and have a lot of luxuries built in to that, but we no longer have a mortgage and have no children. I also live in Arizona, but have lived in San Diego and have a little experience with a HCOL area. We also have no debt: for someone starting this financial journey with a significant debt load, a $30k total spend is obviously trickier.

Which all goes to say, I wouldn't agree with your blanket statement that it's "VERY easy" to live on 30k in this country. That viewpoint ignores too many variables.

Besides, even if we accept your premise, is investing $10k total a year any way to really gain wealth? For someone trying to retire by age 40, I'm perplexed by your position.

If we are assuming two earners, this hypothetical family grossing $40k a year CLEARLY has an income problem. They're making $10.00 an hour, if we assume each worker puts in 40 hours, and takes two weeks off a year (sick time, sick kids, maybe one week of vacation). We're flirting with minimum wage levels, so there's definitely an income problem. Whether they also have a savings problem depends on their situation.

Yes, yes, some people spend every penny they make. Yes, if you never learn to save or invest, and get more income, it will be spent. Income's no silver bullet.

But we don't need to set up a dichotomy between frugality and earning more. They're both important, and hell, I've written about how a dollar saved is clearly more impactful than a dollar earned. But whether someone leans more towards one strategy or the other is somewhat immaterial.

First, good discussion! I like having a debate with someone who is capable of arguing in a mature fashion even though we may disagree. :)

Regarding numbers, about 10 years ago I lived on between $900 and $1000 a month for 4 straight years. That's it. I paid for rent, car insurance, groceries, entertainment...everything out of that $12k a year and even contributed a little to a long term retirement account.

Even if you assume 100% inflation (where the cost of stuff is double today), that's $24k a year if you also double the income. It is possible to live off of far, far less than most people think. I understand that everybody's circumstances are different. I get that. But, that doesn't mean that living off of $30k a year to provide for your basic needs isn't possible...or easy.

But yes, I would consider investing $10k a year a way to gain wealth if you make $40k and invest anything above what it takes to provide for your basic needs. In fact, if someone invests nearly 100% of their after-basic-needs income every month, my money is on THEM to retire before someone who makes twice them, but isn't as good of a safer. Why? Because this person is a determined saver. He or she is making smart decisions with their money, and their lifestyle has been put in check because of it. There are a lot of people out there like that.

And that's ultimately what this discussion comes down to. It's not the numbers. The question is whether or not additional income equates to additional savings.

And to that end, I agree with you that it COULD (and even should), but I do not believe that's anywhere near a given. In fact, I believe that income is the "poorest" (pun very much intended) indicator of wealth. It definitely helps your potential retirement growth, but the difference between potential growth and realized growth is in the lifestyle.

The devil is in the details, and I believe lifestyle to be the main element of that devil.

I think that we agree more than we disagree, here. We only disagree in how many would actively make the choice to transform their lifestyle into one that prioritizes saving a little bit more. Some would, and that's definitely better than none. :)

I agree: good discussion. A few last counters, and then you can have the last word.

-I think it's incredible that you lived on $12k annually. But it's not always great to apply one's own situation to make blanket statements about what's financially possible for others. I'm presuming that $1k budget involved some form of bachelor/roommate living in a low cost area like AZ. But for a lot of families, kids play a role (so roommate situations aren’t as acceptable). Location plays a big role (esp. re: health insurance), as do past financial decisions. Which, as you said, takes us back to the devil in the details. What's possible for someone to live on is only going to be determined by a close look at his financial situation.

-Income is a going to be a big part of that analysis, and income is, by definition, a critical component of wealth building. I took a look at your budget posts, and it looks like you're now in the $50k-60k annual spending range, with a healthy six figure income. This is great. This also supports my point: income plays a key role in building wealth and improving lifestyle. That $3,200/month ($38k annual) mortgage requires a certain income. So do car loans, as do maxing out 401ks, as do big honking investment deposits every month. To make these fantastic gains from where you were on a $12k budget, massive income gains had to be a part of the equation.

-I also think that passionate defenders of frugality get too enamored with the approach, and don't give proper credence to its limitations. Frugality, by definition, has diminishing returns as it is applied to greater degrees. Low hanging fruit may abound at first but, eventually, every frugalista gets to a point of 'enough'. Eventually, we don't want to (and should not) cut out certain parts of our budget: at that point, we're going to see diminishing returns. While you've pointed out additional income's pitfalls (mainly, that it might be spent), it has an incredible advantage in that it's potentially unlimited.

-I also think that the stereotypical MMM convert (fairly young, single, DINK, or maybe one kid, along with a six figure household income) ironically ignores the importance of income. I believe this comes from the convenient fact they already earn so much, that now they can focus on their spending alone and watch the net worth skyrocket.

-While it's not a given that any additional income will be saved, it's also not a given that it will be spent. The point I'm making is that additional income provides options. Even if additional income is spent today, tomorrow (or a year down the line), the lightbulb can turn on, and then that income can really be put to use.

When COMBINED with frugality, (and here's our middle ground) a family with an additional income can really leverage the best of both approaches.

Last word: My apartment was in Colorado Springs, CO with no roommates. :)

Let's end on a high point - I agree that an increase in income provides options. There's no two ways around that one, and I am right there with you that more options ultimately equals a better future. :)

It's always nice to get even more from a blog post in the comments section. Great discussion.

Coming from the perspective of a family of four with two wage earners who purposefully dropped their income from the mid six figures down to much, much less - I can confidently say that the frugal lifestyle can compensate enormously for decreased income (beyond what I would have ever believed), but ultimately, our net worth is going to be a slow grind until we get back to higher income levels.

That being said, our net worth is much higher than nearly every one of our friends/family who are bringing home much bigger paychecks.

Both factors play a role, but without the frugal lifestyle / skills - income can be irrelevant.

That's an excellent point, Emily. Without a certain degree of frugality, any income usually just gets spent, no matter how big. We consumers are a poor match for marketers and their ever-newer-and-better gadgets.

I think I have a bit of an axe to grind with the frugality bloggers, which is not fair, as I'm kind of one of them. I feel like the scrimp-your-way-to-wealth approach is generally a fantastic one, but a poor solution for households in the bottom couple income quintiles. Which is fine: frugality need not work for everyone.

I think the thing that a lot of people neglect in these so called frugality v. income conversations isn't just income but the stability of life that comes from stability of income. From what I've seen a single parent with children needs to be earning at least 30K+10K per kid in child care to hit the "stability point", and they can't earn this for one year and then be stable, it has to be for several years in a row which is tough for some people and easy for others. Lower income earners tend to be more expendable. People with children (especially single parents, or low income dual earners) have to contend with childcare issues to keep their jobs. It's more difficult for parents to have stable income than it is for single people. It's more difficult for people with mental health issues to have stable income than it is for mentally healthy people.

The stability point is where you can start making long term decisions such as investing for retirement, eliminating or reducing your car dependency, changing where you live easily, shopping at low cost grocers, getting ahead in your career, and making helpful friends. Once you've reached the stability point, you don't have to worry about status spending because you've achieved status by your stability. You can forgo "comfort spending" such as spending on alcohol or fast food because your lifestyle is already comfortable.

I can easily imagine my family living on about $36K per year (inclusive of healthcare costs and childcare costs) but only because we've been living on more than that for some time. Now we have a paid for home, with a roommate. We have functional bicycles and commutes that lend themselves to no car at all. We have friends who would care for our son in a pinch, and we have the money to cover a medical emergency.

A little late to this party but love your post here Hannah and your insight on "stability".

To the child care point, that is a subject that often does not get enough attention across the financial blogosphere. It has HUGE financial ramifications, across all 5 quintiles. Even though my wife and I are fortunate enough to be in the Top quintile in both net worth and income (Dual Income, One Kid), it's a huge drain on our ability to save more and frankly, it's even a serious consideration on how many (or even whether to have) more kids.

Alexis de Tocqueville once commented that it is easy for men in America to make fortunes, but even easier to lose them (can't find the reference, but if I stumble across it, I'll link back).

This, I think, is where personal finance and economics must intersect. Our economic system should enable people to make great fortunes (which is mostly difficult if you are earning even the paltry numbers that you've stated, but easier if you are self employed), but personal finance needs to teach people how to keep them.

Peak earnings are nearly always paired with peak consumption rather than peak investment.

Hi there, Hannah! Thanks for the Tocqueville quote: he has some great insights on our culture.

I'm probably in the minority, in that our increased earnings were the main driver for our increased investments. Though a lot of other factors came in to play (e.g. - reading personal finance blogs like Mr. Money Mustache) so it's hard to say the income was definitively the cause. Maybe we'd be doing well with a flat or declining income, too.

I like numbers, I like cool looking graphs, so this is approved. For me numbers like this, I don't give too much thought to at least as far as my personal net worth is concerned. It certainly does say a lot about the general public in general, but in most cases this falls on the other side of the fence for me.

I'm one of those people that lost a great deal of income over the last seven years. When I was working full time I made decent income, even for LA. It wasn't six figures, but I lived a comfortable life. Now it's very challenging AND living in LA because like you said it's a medium income. I fall in the middle, but living here makes even that challenging!

Location is such a huge determinant. I remember living in SoCal and trying to explain the impacts of COL to my friends in Pittsburgh. To put it kindly, they didn't really get it: living in a highly desired coastal city has a ton of knock on spending impacts. Rent is higher, but because the rent for the grocer is higher, too...the price of groceries goes up. And gas. You probably commute further to find affordable living in a decent hood. And on...

Income might be higher but, and this is just my own experience, it often doesn't really make up for the costs.

Still, Southern California is such an awesome place that I think the tradeoffs are often worth it.

So true So true! Housing whether it is rent or mortgage really sucks up a large portion of your budget. And the costs of the other things do add up as well. I absolutely agree that the higher income often doesn't make up for the costs. Here in NYC, unless you're one of the wall street guys, those in the white shoe law firms or other high paying jobs...the other workers really don't see the big incomes. While it may be a little higher than a comparable job in the Midwest, it doesn't compensate for the higher costs (and NYC has it's own income tax as well!)

And you need to write more. When the laziest PF blogger is outpacing you, there is something wrong. ;)

My personal take is to find employment with big city employers, but negotiate virtual/WAH work set ups. I fully intend to do this for the rest of my working career, as the savings are too great to ignore, and the big companies anchor salary based on what they think the job should pay for their city.

Very interesting to see those numbers from 2000 to 2011, and hard to dispute that the gap between upper middle/upper class groups and other groups is growing. From personal experience, focusing on earning more is step 1. Step 2 is investing more with your increased earnings. (I know it's easier said than done!)

I could not agree more. Though in 2010, I'd be arguing the other side: frugality first, then income. My thinking has changed over time, and now that I'm on top of my finances, I really appreciate just how powerful income is.

I just love the "study" that you're doing here and the info that you are presenting. Very interesting and eye-opening. This changes things from the last post you made since now were looking at more facts than just income ranges.

Thanks, Kayla! The median figures are helpful, but I actually prefer the ranges. The ranges themselves give interesting median values (just at the top/bottom of each range, rather than the 'middle' median).

My perspective on this is to establish a 'natural' level of spending that provides what you need or want and makes you happy, then work hard to keep building income and sustaining that same level of spending. Then you can choose how fast you want to build your net worth. This is at least how I'm approaching things, although I'm fortunate to work in finance where there's probably greater opportunities to grow your income if you work hard and really want it. Of course there's plenty of other ways to make money which require a little more creativity, but people really have to have the motivation and understand what's possible. I'm guessing many in the lower quartiles either don't see significantly growing their net worth as a possibility, or just focus on getting by and living life month to month. If only reading 'Rich Dad Poor Dad' was mandatory in school!

That's a clever approach, Jason, and one we take, too. We plan on spending right around $30k, and motivate ourselves to make as much as we can above that because it all goes right to early retirement and/or rentals, which I guess is the same bucket.

I always have mixed feelings on Rich Dad Poor Dad. It's a polarizing book, but it really hits home that people need to invest in assets if they want to be wealthy.

I'm actually amazed that the "upper" quintile isn't higher than it is. And that it's significantly higher than the 4th quintile. I do think that the chart (especially of changes since 2000), shows the power of compounding really well - on both the earning and owing sides. Interest rates are almost always higher on the owing side :(

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.